5 Reasons Credit Unions Worry About Risk-Based Capital

Credit union executives have expressed a host of concerns about the NCUA’s risk-based capital rule proposed at the agency’s January board meeting.

Under the proposed rule, a credit union with more than $50 million in assets is rated adequately capitalized if it maintains a risk-based capital ratio between 8% and 10.49%, and a net worth ratio of 6% to 6.99%. A risk-based capital ratio above 10.49% and a net worth ratio above 7% would designate a credit union as well capitalized. A risk-based capital ratio under 8% and net-worth ratio between 4% and 5.99% is considered undercapitalized.

Also of Interest:

NCUA Chairman Debbie Matz announced Feb. 20 she will host three listening sessions, in San Francisco, Chicago and Washington, D.C., this summer. Credit unions and other industry stakeholders can attend and ask NCUA officials questions about the rule and on other regulatory topics.

Click through to read concerns credit unions have shared about the proposal.

Read more: Risk matrix askew …

1. Tougher standards than banks’

“An improved risk-capital measurement is needed within the credit union movement. The NCUA will, however, have difficulty explaining some significant differences in capital requirements vis-a-vis the capital requirements for the same assets at banks,” said Jim Blaine, president/CEO of the $27 billion State Employees’ Credit Union in Raleigh, N.C. “There appears to be no justification for the NCUA to penalize members for borrowing and saving at their credit union,” he added.

“The capital requirements for credit unions with concentration in member business loans is way too high at 14% – higher than what’s required for commercial banks,” said Mark Holbrook, CEO of the $1 billion Evangelical Christian Credit Union in Brea, Calif., noting that unlike banks, credit unions have no means of raising alternative capital.

“So the effect that has on our credit union is we go from well capitalized, which we’ve been at for years, to now undercapitalized overnight. So of course we feel that it’s an outrageous level of capital to be requiring of credit unions that have these concentrations. It’s really a direct attack on our business model, so I’m deeply concerned about that,” he added.

Read more: Credit unions growing nowhere …

2. Growth Impact

David Osborn, president/CEO of the $1.4 billion Anheuser-Busch Employees’ Credit Union in St. Louis, said the 10.5% “well-capitalized” requirement under the proposal rule is a huge jump from the current level.

“Even though I was pleasantly surprised that our numbers came out well above that – we are in a growth mode – I think our concern here is that if we start growing, obviously capital will be affected and we might bump down to the 10.5% figure so in the long term you’ve got to be concerned about what growth would do to your numbers,” Osborn said.

Read more: What about IRR?

3. Interest Rate Risk

“Interest rate risk in the loan portfolio is ignored. Credit risk is not totally ignored but it’s not carefully calibrated,” said Denise Boutross McGlone, executive vice president and chief financial officer of the $2.2 billion Affinity Federal Credit Union in Basking Ridge, N.J.

“How could a 50% LTV mortgage be considered the same as a 100% LTV?” she added.

Read more: Unintended run on deposits?

4. The NCUA’s Risk-based Rule Calculator

“From an agency that makes a really big deal about reputation risk, I don’t understand why they are choosing to publish information on a proposal that gives the impression that our credit union is undercapitalized. It doesn’t make a lot of sense to me,” Holbrook said.

Read more: Fueling the consolidation fire …

5. More Mergers

“I do think this [rule] will definitely increase the mergers. I don’t know but that may very well be the intent of NCUA – to speed up the mergers; to not have to supervise these undercapitalized credit unions,” said Cheryl Hubbeling, CEO of the $43 million Rapid City Telco Federal Credit Union in Rapid City, S.D.